What to do about a bank account levy

If you’ve been sued for an unpaid debt, the court may allow your creditors to directly withdraw funds from your bank account via a levy. With an account levy in place, you may be unable to access all your funds.

In some circumstances, it may be possible to have the levy on your account lifted. If you have an account levy, you should know how it works and how to resolve it.

What is a bank levy?

A bank levy is a legal action taken against you by a creditor or debt collection agency. A levy allows the creditor to take funds directly from a bank account to satisfy unpaid debts or taxes.

In most cases, levies are permitted only by court order as part of a lawsuit judgment. However, certain government agencies, including the Internal Revenue Service, can levy a bank account without a court order. By law, you must still receive advance notice of the levy.

Exemptions to a bank levy

Certain funds are exempted from creditor bank levies by the federal government. They include:

• Child support payments
• Social Security benefits
• Supplemental security income
• Veteran benefits
• Student loan disbursements
• Federal Emergency Management Agency (FEMA) aid payments
• Federal, civil service or railroad retirement benefits

In addition, depending on the laws in your state, creditors may be required to leave a minimum amount of money in your account so you can still pay your living expenses. For example, Pennsylvania state law requires debt collectors to leave at least $300 in a levied account.

How bank levies work

Bank levies don’t occur overnight. A creditor or collection agency must take several steps to freeze your account.

Step 1: The debt goes into collection

In most cases, a creditor will not sue you for an unpaid debt before exhausting other collection methods. The first step is usually sending out collection notices and making calls to your home and workplace.

The creditor may also send your account to a debt collection agency. This agency may attempt to collect the unpaid amount and receive a percentage of the recovered funds as payment. Collection agencies sometimes purchase the debt outright for a lower price and attempt to recover the original amount.

Step 2: The creditor takes you to court

Except for some government agencies, most creditors must first successfully sue you for the unpaid debt before receiving a court order for a bank levy. Your creditor may file the suit with a state civil or small claims court.

If the creditor wins the case, the court will issue a money judgment that determines how much you owe. You may be able to appeal the judgment.

Step 3: The court issues an order for a bank levy

After the money judgment has been issued, the creditor can file documents with the court to receive a bank levy on your accounts.

When this happens, the creditor must notify the bank involved. The bank will then freeze the account, which means you’ll be unable to withdraw any money (excluding a minimum allowance if permitted by your state’s laws).

With a bank levy in place, the creditor can seize the funds necessary to recover the unpaid debt as determined by the money judgment. The bank levy may remain in place for several pay periods if there aren’t sufficient funds in the account to satisfy the debt.

What to do about an account levy

If your account has been levied, you may be able to fight the account levy or quickly resolve it.

1. Review the debt

If a levy has been placed on your account, you need to fully understand the debt you owe.

Ideally, you should review the debt before the court hears the lawsuit. Creditors sometimes make mistakes. The amount claimed could be incorrect — or even someone else’s unpaid debt.

If you don’t believe the debt is yours or think the amount is incorrect, send a debt validation letter via certified mail. The letter should state that you dispute the debt’s validity and would like documentation to verify it.

If you have already paid off the debt, find proof that supports your case. This can be a letter, receipt or statement you received once you made your last payment.

In addition, look to see if you have been the victim of loan identity theft. You may be able to stop the levy by proving that the funds went to someone else. To file an identity theft report, submit a theft complaint to the Federal Trade Commission (FTC) via IdentityTheft.gov or by calling 1-877-438-4338.

2. Pay the debt

After you’ve confirmed that you owe the debt, the best thing to do is to pay the debt. Ignoring a bank levy can cause increased fees, credit score damages, wage garnishments or other attempts to collect the debt you owe.

3. Negotiate with the creditor

The debt collection process can be costly and slow, so lenders may prefer working with you to settle the debt instead of levying your bank account. An attorney or credit counselor can help facilitate these negotiations. A reputable credit counseling service may also put you on a manageable debt repayment plan for a small fee.

Your options will depend on the lender and may include a modified payment, a lower interest rate or a hardship program. Negotiations may also prevent the creditor from levying more funds.

4. Check the statute of limitations

Creditors can only take legal action to collect debts during a limited period, called the statute of limitations. If the statute of limitations has passed, the creditor may not be able to use a bank levy to withdraw money from your account.

Check your state laws for more information about statutes of limitations on debt collections. You can also reach out to a lawyer if you’re unsure or need further clarity.

5. Contest the lawsuit

In some cases, you may be able to contest a creditor’s lawsuit. There are multiple ways to do this — for example, by showing that the creditor did not follow the steps required by state law or that they did not adequately prove their case. You may also be able to file a counterclaim if the creditor or debt collection agency engaged in unlawful practices while attempting to collect on the debt.

Lawsuit contests and counterclaims are multifaceted and complicated. There is also no guarantee that fighting a lawsuit will be successful. The process and rules for contests and counterclaims may vary by jurisdiction. Consult with an attorney to find out if contesting a lawsuit is a valid option.

6. Open a new bank account

Bankrate insight: You are still required to pay what you owe. Starting a new bank account should only be to make sure you can pay your bills while your account is frozen, not to avoid legal action taken against you. If a creditor suspects you have money stashed away when you aren’t paying your debt after a bank levy, you are likely to have more legal trouble. 

Bank levies can take some time to resolve. Because you’ll have limited or no access to your income when a levy has been placed on your account, you may need to find another way to pay your bills. One way you can do this is by opening a new bank account through a different bank.

Once a new account is in place, link all your automatic bill payments to the new account to avoid missing any payments and making your financial situation worse. If you’re unable to open a new account, you may decide to cancel your direct deposit for your paycheck and receive a paper check. You can then cash the check and purchase money orders or cashier’s checks to pay your bills.

Note, however, that a new account does not guarantee your money will be untouched.

“Opening a new bank account to avoid losing the funds in the account does not necessarily solve the underlying problem of losing your paycheck to a collector,” says Christopher E. Roberts, an attorney with Butsch Roberts & Associates LLC. “This is because the collector may also garnish a consumer’s wages if they find out where you work.”

7. File for bankruptcy

You may decide to file for bankruptcy to remove a bank levy. This option varies from state to state and should be used only as a last resort. It’s best to consult a bankruptcy attorney in your area for help if you are considering this to see how the bank levy would be affected.

“Generally speaking, filing for bankruptcy puts a hold on most bank levies,” Roberts says. “However, bankruptcy is not always the best option, and filing truly depends on the consumer’s personal financial circumstances. A bankruptcy lawyer will best advise as to whether one should file for bankruptcy.

“For example, if the levy concerns a $500 debt, then it would make little sense. On the other hand, if the debt was for $500,000, then a bankruptcy lawyer might recommend filing.”

Next steps

Because bank levies limit your access to money you need to pay your bills, you’ll need to decide what to do if you have one on your account.

Before the creditor takes you to court, review the debt to make sure it’s accurate. You may also be able to negotiate a settlement with the creditor that will allow you to satisfy the debt with a repayment plan. If all else fails, you can contest the lawsuit or protect some of your assets by filing for bankruptcy.

No matter which moves you make in fighting a bank levy, you may want to consider hiring an attorney to assist you in the process. If you can’t afford one, check your state’s legal aid website to find a low-cost or free (pro bono) lawyer who can help you navigate the confusing bank levy process.